Traders Mixed on Outcome of Upcoming OPEC Meeting

At the past three meetings, OPEC could not reach a consensus on managing the market, reflecting deep divisions among members and competing priorities.

It’s been almost two years since OPEC decided not to cut production in order to balance the market and instead follow a market strategy of pumping at will to weed out higher-cost non-OPEC supply. Since then, oil has been in a bear market, with OPEC setting production records and volatility rising to levels not seen since the 2008 price spike. Lately, prices have settled in the $40-$50 per barrel range, but fluctuations continue to be rather sharp and the market appears directionless. The low price environment has indeed choked off investment in the shale patch in the U.S. and other producer countries outside the cartel, but OPEC members are hurting, too, motivating them to try and form some sort of agreement—along with Russia—to manage supply-demand balances and shore up prices. At the past three meetings, the group could not reach a consensus (see here, here, and here), reflecting deep divisions among members and competing priorities.

OPEC, along with Russia, will take another stab at figuring out a strategy to support prices at an informal meeting in Algiers. The gathering has been hyped for some time, with members talking about action through the press in order to jawbone prices higher at a time the cartel is producing at record levels. So far, news reports have said that everything from agreeing to a production freeze to setting new output targets to waiting until the November meeting in Vienna before implementing a plan as possible outcomes for next week. While a surprise agreement is a possibility, expectations are low. As an OPEC source familiar with discussions told Reuters this week: “There will not be a decision. The decision will be shelved until we meet in November.” Plus, even if an agreement is struck, there’s no guarantee members will follow their new targets given the track record of cheating in the past.

Traders, meanwhile, are split about what the outcome will be. The Fuse polled members of the popular OOTT hashtag (Organization of Oil Trading Tweeters) and others to see what the sentiment is among futures traders ahead of the OPEC meeting next week.

No deal expected?

Samir Madani (@Samir_Madani), a futures trader based in Sweden and co-founder of #OOTT, is skeptical a deal will occur as all producer countries have significantly increased seaborne exports and floating storage as of late.

“The cloud of mistrust is not only between OPEC and non-OPEC producers, but within the ring of OPEC itself,” Madani told The Fuse. “Russia just out of the blue announced a colossal increase of production to 11.75 million barrels per day, while OPEC has increased its exports each week, with the current most likely breaking a new record.”

“The cloud of mistrust is not only between OPEC and non-OPEC producers, but within the ring of OPEC itself.”

He added: “I believe that next week’s meeting will be less formal and more about consensus seeking. Low oil prices tend to fly whenever the word OPEC shows up on a headline, but as soon as these members publicly announce their statements, they tend to be quite bearish. These countries rely on oil revenue. It’s just that simple. Look at Libya, for example. Given that Libya alone has an ambitious goal of multiplying its daily output 5-6 times over the coming year to get to a decent level, they will definitely not be ready to cut, or freeze for that matter.”

Iran is the biggest obstacle

Lee Saks (@Lee_Saks), a futures trader based in New York, sees the Iran-Saudi Arabia conflict and Iran seeking to regain market share as the major impediments of a deal.

“The upcoming meeting is no more than a meeting with the promise of more meetings,” he told The Fuse. “The most salient obstacle to any oil producer consensus is agreeably Iran, which, apart from its quest for pre-sanction level market share, has seen several of the most acrimonious exchanges between its government and the Saudis over this year’s Hajj debacle. Compounded with the Saudi’s conviction the war in Yemen is being funded and furnished by Iran, any public display of comity between the two can never be taken with enough cynicism.”

“The upcoming meeting is no more than a meeting with the promise of more meetings.”

He added: “Iran has more persistently shifted its rhetoric on what it considers its pre-sanctions level. With President Rouhani making grandiloquent pronouncements of endorsing any measure to restore market balance, the caveat of Iran’s ‘fair quota’ concurrently adjoins every statement. Both Saudi Arabia and the UAE are keen to the reality and have overtly dampened enthusiasm on a joint consensus in Algiers, but continue to feed the market with modest optimism with deliberate intent to keep prices buoyed for as long as they can be sustained.”

A deal to push prices to $50-$60?

One trader (@HeidsterTrades), part of the #OOTT group, sees an agreement taking shape out of economic necessity, despite internal divisions.

“While I have a difficult time believing that members can come to any agreement ever, I am inclined to believe they will agree on some sort of production ceiling,” she told The Fuse. “The idea of a ceiling for each country makes sense to me. Even though the rumors have tilted more toward talk about no agreement being made, I feel that they are going to try harder to do something this time. I was really surprised at the market reaction after the Doha non-agreement. Low oil prices are taking a toll on the producers’ economies, inflation is low everywhere, millions of people are out of work, and countries are going bankrupt, so it doesn’t make sense to keep prices so low.”

She added: “If they do put ceilings in place, or somehow manage to accommodate Iran by carving out an exemption, I’d expect oil to move into the $50s over the weeks following the meeting, and, as long as OPEC countries adhere to the agreement, for prices to rise from there.”

Market to remain range-bound if no deal

Lisa Ward (@Lisa_Ward1990), based in North England and co-founder of the #OOTT group, says that if OPEC, along with Russia, can’t strike a deal, the oil market will likely remain in its current range.

“So far, Saudi Arabia, Russia, Libya, and Venezuela, to name a few, are keen to raise crude prices but need to cut production levels by around one million barrels per day in order to push the market up to $50-$60 per barrel within six months,” she told The Fuse. “The only way they can do this is by arranging ceilings on production or putting together a freeze deal and involve non-Opec countries too.”

“If no deal happens, then we will most likely just keep ranging.”

She added: “This will be difficult to do, though. Iran is still aiming to surpass pre-sanction levels and has no plans of slowing down as of yet, and, of course, it still has the ongoing conflict with the Saudis. And Russia has reached record production levels so far this month. If no deal happens, then we will most likely just keep ranging.”

Options markets reflect ambivalence

The options market, which can be a predictor of future price moves, shows a lack of conviction that OPEC will act, says one market watcher Lou Pellathy (@carbonreports), who closely analyzes trends in options contracts. Options give a buyer the right, but not the obligation, to buy or sell a specified number of shares at a predetermined price within a set time period.

“The options market in WTI crude oil can best be described by one word—balanced. There seems to be no strong sentiment either towards puts (lower) or calls (higher),” he told The Fuse.

“The options market in WTI crude oil can best be described by one word—balanced…The WTI options market is on pause, waiting for the next trend.”

He added that another sign of options ambivalence is the balance in the December 2016 options contract, which tends to be one of the most liquid contracts in the options market. The options market predicts over a 50 percent chance that December futures trade between $41-$51/bbl. “The WTI options market is on pause, waiting for the next trend,” he said. “OPEC has no discernable impact at the moment. The options market has written off any OPEC involvement in price manipulation by withholding supply. While the Russian/Saudi alliance is an interesting variable to consider and makes for great speculation, there are a host of other countries such as Iran, other OPEC members, U.S., and Canada that would happily to step in and make up the difference.”

Wait till November?

Recently, the market has gotten whiplash from all the comments from OPEC sources and officials going back and forth whether there will be a deal of some sort at the upcoming meeting in Algiers. With quotas being so contentious and a number of producers, such as Libya, Iran, Iraq, and Nigeria, recently stating their intentions to increase output, putting together an agreement will be a difficult task, but shouldn’t be ruled out. Even if the group can’t come to an agreement next week, it could set the stage for reaching a consensus when it meets in November in Vienna.

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The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

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DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.